MachineGhost's Research Resort

[InsuranceGuy]

[deleted]

[MachineGhost]

Another day, another update with the most realistic historical data around!  I've dropped using 1-year T-Bills because it is such a drag on returns vs 3-month T-Bills.  I don't care if Browne recommended them or used them in his returns history -- the duration exposure is enough to be a loser.

[img width=800]http://i.imgur.com/E7aY0ev.png[/img]

[MachineGhost]

While I've been trying to compile daily historical returns data I've been playing with metrics on random data with similar CAGR/StDev.  While I like UPI I like the following better (for laughs we'll call it the InsGuy Performance Index):

IGPI = (CAGR - RFR)/IGI

Where IGI = AVG( SUM(ABS(Ri))/N , SQRT(SUM(Ri^2)/N) ) and Ri=drawdown at time i

It's similar to the UPI but gives more penalty to longer drawdowns.  The UPI seems too focused on sometimes very short-term large drawdowns.

Hmm, how short of a large drawdown does IGPI put the threshold at?  How's it do on tight money years 1969 and 1980?  1969 was kinda brief but 1980 was longer.

One thought I forgot to follow up that I had a few weeks ago was that we should weight drawdown aversion in according with cognitive bias principles.  Since losses are 2.5x as times as painful as a 1x winner, then the weight on the second order moment should ideally be 2.5 and not 2.  This will reduce the UPI/IGPI scores a bit.

[InsuranceGuy]

[deleted]

[Cortopassi]

I see so many of these heavily involved, spreadsheetized posts go by, as well as ones on momentum and have to chuckle.

I've never been happier sitting back and doing basically nothing with the PP, except starting to tilt the percentages.  It is a very calming portfolio.  Sure, it helps it is up 7.5% for the year.

My to do list for today:  Top item is get mulch for landscaping...

[InsuranceGuy]

[deleted]

[stuper1]

2.5% extra CAGR a year, with little added potential drawdown risk, is huge, especially considering that a lot of people rebalance each year anyway.  All this involves is just looking at the previous year's results for each asset, and then switching your momentum assets if necessary, which as I posted before only requires one switch per year on average (not two switches).  To me, this is a huge breakthrough.  I think I'm going to start implementing at the end of this year:  50% golden butterfly, 50% to top 2 assets from previous year.

[MachineGhost]

Lastly, I've never heard the bias for 2.5:1 for W:L.  I'm unclear how we could force that in IGPI/UPI as winners are literally infinitely better than losers in both cases.  I am curious if you have some idea of what you might do to bring these measures in line with the 2.5:1.

Very easy.  You square it by 2.5.  The drawdown aversion is in the squaring, the second order moment.  I don't know that it has any real world effect but when I see the PP only makes 7-8% CAGR with a 25% MaxDD, the cognitive bias is coming into play hard core because the gains are not even remotely going to cover the pain of a loss that large anytime soon.  But 108 weeks later you'll have it covered.  So you are onto something about penalizing longer MaxDD durations.

[MachineGhost]

I've never been happier sitting back and doing basically nothing with the PP, except starting to tilt the percentages.  It is a very calming portfolio.  Sure, it helps it is up 7.5% for the year.

Faith is a four-lettered word.  I don't believe in it.  Since no one has tortured tested the PP in a realistic manner (that I'm aware of), it falls upon me to do so.

[MachineGhost]

I am happy for you, in fact I feel the same way about my portfolio.  I guess it helps that I made returns of 2.5%/yr over the HBPP and 0 negative yearly returns over the last 10 years.

All from checking PP asset momentum just once a year?  Fantastico!  I'm really surprised it seems to work, but next up is checking calendar month reboustness.

One thing I'm really glad about with the more recent accurate data, is you really do see the power of trend following to mitigate downside risk.  I was having my doubts if it would work together as a whole in the PP, but no longer.  My concern isn't really with the upside gains in-as-much as circumventing the -25% downside risk.  I'm not relying on the PP for a growth vehicle (and to my way of thinking, a non-growth vehicle should not have a whopping -25% MaxDD!).  But in lieu of other practical alternatives for achieving higher returns, if IG's approach can get 2.5% more CAGR with no more risk than the core PP, why the hell wouldn't anyone do it?  It's leaving money on that table.

[MachineGhost]

Monthly robustness check.

[img width=800]http://i.imgur.com/abwGmjv.png[/img]

[InsuranceGuy]

[deleted]

[MachineGhost]

Well, this is surprising.  I checked the performance of just using trend following (checked daily) on one of the assets (others rebalanced annually as per usual) and it doesn't work.  It's a package deal, I'm afraid.  This may be a harbringing of the failure of using individual rebalancing bands on the assets, also.

[img width=800]http://i.imgur.com/2h2p8gI.png[/img]

[MachineGhost]

Interesting that January isn't the best in any of them.  I had on my todo to do the same thing.

Well, it is for the Browne PP in terms of MaxDD which everyone likes to quote.  Hence, its unrealistic.  This only goes to show that you should be careful which months you buy/rebalance in depending on your strategy and that dollar cost averaging in instead of a lump sum purchase will smooth out the variability.

I consider the Full Invested Momentum to be broken and would never use it.  It's from the firm Ned Davis Research which isn't available to retail.  It was claimed as having 13% CAGR with -21% MaxDD.  Goes to show you can't trust what so-called "professionals" put out either.  They're just overpaid employees, not real investors or traders like we are.  Never ever put real money on the line in any strategy being pushed by anyone unless you first backtest it yourself with superior data than what was used to formulate and push it.  We're just very lucky the Browne PP worked out of sample or we wouldn't be here.

[MachineGhost]

Some other permutations.

[img width=800]http://i.imgur.com/pwJ7Lri.png[/img]

[MachineGhost]

But wait, there's more!  Here we see the smoothing effect of using other periodicities than daily.  Realistic or unrealistic?  You decide.

IG, since you've been doing the top 2 dual momentum for 10 year or so, which of the boxes best matches your actual experience in terms of drawdown risk?

[img width=800]http://i.imgur.com/n0SGPjh.png[/img]

[InsuranceGuy]

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[MachineGhost]

So I do Top2 Yearly with other asset classes in addition to the PP classes.  I have only been tracking my results monthly so my MaxDD is probably more than the number in my monthly spreadsheet.  Anyways, from 2006-2015 I had 9.7% CAGR with MaxDD -14.5% from Feb 2008 to Oct 2008.

And that was 60% to the top 2, 40% buy and hold PP, right?

[stuper1]

So I do Top2 Yearly with other asset classes in addition to the PP classes.  I have only been tracking my results monthly so my MaxDD is probably more than the number in my monthly spreadsheet.  Anyways, from 2006-2015 I had 9.7% CAGR with MaxDD -14.5% from Feb 2008 to Oct 2008.

Is that CAGR real or nominal?

[InsuranceGuy]

[deleted]

[stuper1]

IG,

You should write a book.  That performance seems phenomenal to me.  Thank you for sharing your ideas with us.  Do you happen to know the MaxDD for the HBPP over that time period?

[InsuranceGuy]

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[stuper1]

So, over the last 10 years, you've gotten a CAGR that was 2.8% higher than the HBPP, with minimal extra effort, and the MaxDD was only 2.5% greater based on monthly results.  To me, that just seems awesome.  I wish I could give you a high-five or fist bump over the internet.  If I knew how to use emoji's, I suppose I could.

[MachineGhost]

60% Top2, 40% B&H.  I do Gold+Stocks+TBonds+TBills+other asset classes, so not just PP.  I started by just adding SCV, but have done a couple of different iterations over time with similar risk/reward.  I think if I had just done Gold+Stocks+TBonds+TBills+SCV my returns would have been a bit higher with a little less drawdown.

That's right!  I added the factors.  So worst case you should have a MaxDD of 22% based on the latest stats:

[img width=800]http://i.imgur.com/L5zr9p6.png[/img]

I tried small and value together, but small always trumped value so no change.

I really like how the annual-check trend following is essentially the same as the yearly data trend following, except 2% more CAGR to the latter.  Not sure if that is believable or not or the quarterly for that matter.  It may be very date specific.  I may have to do more than just check the starting/rebalancing month, but the actual day of the trade also because of the end of month effect.

[MachineGhost]

Here's a Monte Carlo bootstrap analysis of the Top2 with size (starting with 10K):

[img width=800]http://i.imgur.com/zdlhKma.png[/img]